Πηγή: Open Europe
By Raoul Ruparel
Nov 28 2012
Early on Tuesday morning the eurozone and the IMF reached an agreement which has been widely billed as their most comprehensive package to aid Greece. Now that the dust has settled somewhat, Open Europe assesses the key components of the deal.
Conclusion
For all the talk and all the figures flying around there is still only one that really matters – 124% debt to GDP ratio in 2020, clearly this is not sustainable. Further measures will be needed and the ad hoc nature of this deal, particularly the way it skirts the big decisions, suggests that fears over a ‘Grexit’ will return as soon as Greece begins missing its targets once again.
1. Debt buyback
The buyback is short on details, with little clue as to where the money will come from or which bonds will be purchased. The idea behind a buyback is that Greek bonds are currently trading at around 35 cents on the euro, which the Greek government could purchase and then retire, thereby reducing their debt by the difference in the current and nominal price.
Figure 1: Who owns Greek debt?
Source: Greek Ministry of Finance, Greek Public Debt Bulletins, European Commission, Bank of Greece, Open Europe calculations.[1]
As figure 1 shows, taxpayer-backed institutions – or the official sector (EFSF, Eurozone, IMF, ECB, NCBs, Bank of Greece and other loans) – now hold 70.5% (€212bn) of Greek debt. Greek monetary financial institutions (banks, pension funds, investment funds) hold around 10% (€30bn) of Greek debt while similar firms abroad hold around the same amount. Greece currently has a stock of around €18.4bn in T-bills (short term debt).
It seems that the EU/IMF/ECB Troika expects Greece to be given around €10bn to use for buy backs.[2]
Who would actually sell their bonds in a buyback? The official sector debt is ruled out of any buyback (most is in the form of loans while the ECB has rejected including its bonds). To us it seems illogical for any Greek institution to sell their holding of Greek debt at such a significant write-down, especially after the previous restructuring resulted in such a huge recapitalisation (which offset much of the benefit). The Troika seems to expect Greek banks to provide half of the bonds for sale under a buyback – this is either naïve or counterproductive given the likely recapitalisation needs.[3] Therefore, in reality we expect that only the €30bn of foreign held debt would be available for purchase.
This still fits with the €10bn in funding and the price of 35 cents on the euro and could deliver up to €20bn in debt reduction (around 11% of GDP), if all these bondholders took part.
However, it is unclear how many of these bondholders would wish to sell. Some will be holding the bonds to maturity and will not want to accept any further write downs, while others may be happy to wait for a default and take the case to court due to the new Greek bonds being governed under English law. In any case the debt reduction may be much lower.
Where will the €10bn for the buyback come from? This is far from clear but it is hard to imagine it being found anywhere other than the bailout funds, meaning a new transfer of around €9bn will be needed. This again poses significant political problems as leaders in Germany, the Netherlands and Finland (to name but a few) try to convince their parliaments (and public) that this is not more money into a black hole. It has been suggested that some of the other mechanisms mentioned below could be used to fund the buyback, but this looks impossible since they are being tapped to fill the existing funding gap.
These substantial obstacles to a successful debt buyback are crucial since the IMF has already stated its on-going participation in the Greek bailout hinges on this policy. The likes of Finland and the Netherlands have also previously stated that IMF involvement is requirement if they are expected to continue to aid Greece. With a plan on the buyback expected to be in place by 13 December, to allow for the release of the next tranche of bailout funds, this deal could hit a wall even sooner than many expected.
2. Interest rate reduction
The original bilateral loans to Greece will see their rated reduced by 1%, making it 0.5% over the 3 month Euribor rate. This means the interest on the loans could now be around 1% given current rates. Clearly this is much lower than the majority of eurozone countries can borrow at (especially given the very long maturities of the loans). Countries which are under a “full” bailout are exempted, although Spain, which is in the progress of seeking a bailout for its banking sector will not be. This could further political divisions within the eurozone.
This (along with other slight interest adjustments agreed) could deliver around €3.5bn up to 2016, so although it helps with the bailout extension it does not provide any real debt relief.
Meanwhile, reports already suggest that the Portuguese government has told its parliament that it will be seeking a similar deal with regards to its bailout.[4]
3. Deferral of interest and extension of maturities
This could aid in the short term, i.e. helping to fund the two year extension. However, on net it delivers no reduction and is once again a very short term ad hoc measure aimed at avoiding taking any significant decision on the Greek crisis – especially since a deferral on some interest payments was already in place. Similar things can be said of the maturity extension, especially given that many of the loans already have long maturities at 15 years. Once again this rescheduling of debt would amount to a technical default in most scenarios and does represent creditors forgoing real payments for a substantial amount of time.[5]
4. Dispersal of profits from the SMP
A key point here is that the ECB is not providing the money directly to Greece – thereby avoiding the legal problems of ‘monetary financing’, i.e. directly paying for states. The money will be dispersed to member states as usual and they will pass on an amount equivalent to this to Greece.
The issue with this however is that the profit from ECB actions, including profits accrued from its bond-buying programmes, is usually done on an annual basis and is paid out after it has passed through the ECB profit and loss account (meaning it can be used to offset any ECB losses, although this is unlikely at this time). It is not clear yet whether this will constrain when and how the money can be transferred. However, if the schedule is not the same a plausible case can be made that this is an additional injection of funds rather than a transferral of funds (although this is admittedly semantic over a long period).
5. The prospect of further measures in the future
The Eurogroup statement left the prospect of further measures to reduce the Greek debt burden hanging, teasing markets into believing that an official sector write down is just around the corner.
However, this does not quite seem to be the case. Firstly, such a prospect will only be realised if Greece manages to stick to its (still) strict reform and adjustment programme, something which, despite the extension, remains unlikely. This is driven home by the extensive strengthening of the ‘escrow account’ which increases the level of oversight and makes debt servicing the clear primary objective of the Greek government.
Secondly, while many have interpreted this deal as a step towards a larger more complete decision to keep Greece and others in the eurozone (some form of permanent fiscal transfer) this does not seem to immediately be the case. This deal does everything to avoid taking such a decision, and continues to sidestep the issue even if that means prolonging the pain and putting more taxpayer cash on the line. The hope is that such a deal will be politically more palatable after the German elections next autumn. This may well be true but given that many of the constraints on solving this crisis are legal as well as political, such a decision may not be much easier even after the elections.
Lastly, as the WSJ and FT point out today, extra measures will be necessary to reach the target of 124% debt to GDP in 2020.[6]
What does this deal mean for the Greek economy and the Greek people?
This is a question that has not been asked enough in the past two days, particularly the second part. The increase in oversight through the escrow account and the continuation of the current bailout programme mean more of the same for the Greek economy. Significant structural reforms are still to take place and internal devaluation is on-going. The two year delay in fiscal consolidation looks significant on the surface but much of this is offset by the amount Greece has missed its targets by this year given the two elections. The actual pace of fiscal consolidation is still rapid and the adjustment over the next few years, in an economy which is still contracting, will be unprecedented. The pay-out of the tranches (when and if the buyback hurdle is overcome) will be positive for Greece but only serves to help the economy limp along.
Given the impact on the Greek economy, the impact on the people can be inferred. There is unlikely to be any significant turnaround in the economy in the near future and the impact of public sector cuts will continue to be substantial, albeit maybe not as sharp as it would have been before the two year extension. However, the assumptions on unemployment in the Greek budget and latest Troika report look hopelessly optimistic – we expect it to continue to rise and public unrest along with it. In both cases more of the same seems to be on the cards despite this deal.
For more information please contact the office on 0044 (0)207 197 2333 or the author Raoul Ruparel on 0044 (0)757 696 5823.
[1] See here for a more detailed breakdown of debt shares and exact amounts for each share. The debt total of €301bn seems low given projections for the end of the year, however, when the next tranches of €34.4bn and €9.3bn are factored in the debt total is clearly in line with expectations. This does not include guarantees given by the Greek government, which amount to around €20bn. NCBs refers to National Central Banks.
[2] This amount is taken from a leaked document the key table of which was published by the FT. Cited by the FT Brussels blog, ‘Greece, round 3: let the debt relief talks begin’, 28 November 2012. For the specific table see:http://blogs.r.ftdata.co.uk/brusselsblog/files/2012/11/greece.pdf
[3] This is taken from a leaked document the key table of which was published by the FT. Cited by the FT Brussels blog, ‘New Greek bailout: the leaked chart’, 28 November 2012:http://blogs.r.ftdata.co.uk/brusselsblog/files/2012/11/Greece-2.pdf
[4] Cited by Journal de Negocios, ‘Portugal terá juros mais baixos e prazos mais longos nos empréstimos europeus’, 27 November 2012.
[5] This refers to the ‘Net present value’ loss which countries will face. Essentially this arises as future revenue flows are discounted, therefore the longer the payment of these loans is put off the less the money is seen to be worth in today’s terms. This drives home that creditors will be taking a loss somewhere along the line on these mechanisms.
[6] Cited by WSJ Real Time Brussels, ‘Greek debt deal explained’, 27 November 2012.
Nov 28 2012
Early on Tuesday morning the eurozone and the IMF reached an agreement which has been widely billed as their most comprehensive package to aid Greece. Now that the dust has settled somewhat, Open Europe assesses the key components of the deal.
Conclusion
For all the talk and all the figures flying around there is still only one that really matters – 124% debt to GDP ratio in 2020, clearly this is not sustainable. Further measures will be needed and the ad hoc nature of this deal, particularly the way it skirts the big decisions, suggests that fears over a ‘Grexit’ will return as soon as Greece begins missing its targets once again.
1. Debt buyback
The buyback is short on details, with little clue as to where the money will come from or which bonds will be purchased. The idea behind a buyback is that Greek bonds are currently trading at around 35 cents on the euro, which the Greek government could purchase and then retire, thereby reducing their debt by the difference in the current and nominal price.
Figure 1: Who owns Greek debt?
Source: Greek Ministry of Finance, Greek Public Debt Bulletins, European Commission, Bank of Greece, Open Europe calculations.[1]
As figure 1 shows, taxpayer-backed institutions – or the official sector (EFSF, Eurozone, IMF, ECB, NCBs, Bank of Greece and other loans) – now hold 70.5% (€212bn) of Greek debt. Greek monetary financial institutions (banks, pension funds, investment funds) hold around 10% (€30bn) of Greek debt while similar firms abroad hold around the same amount. Greece currently has a stock of around €18.4bn in T-bills (short term debt).
It seems that the EU/IMF/ECB Troika expects Greece to be given around €10bn to use for buy backs.[2]
Who would actually sell their bonds in a buyback? The official sector debt is ruled out of any buyback (most is in the form of loans while the ECB has rejected including its bonds). To us it seems illogical for any Greek institution to sell their holding of Greek debt at such a significant write-down, especially after the previous restructuring resulted in such a huge recapitalisation (which offset much of the benefit). The Troika seems to expect Greek banks to provide half of the bonds for sale under a buyback – this is either naïve or counterproductive given the likely recapitalisation needs.[3] Therefore, in reality we expect that only the €30bn of foreign held debt would be available for purchase.
This still fits with the €10bn in funding and the price of 35 cents on the euro and could deliver up to €20bn in debt reduction (around 11% of GDP), if all these bondholders took part.
However, it is unclear how many of these bondholders would wish to sell. Some will be holding the bonds to maturity and will not want to accept any further write downs, while others may be happy to wait for a default and take the case to court due to the new Greek bonds being governed under English law. In any case the debt reduction may be much lower.
Where will the €10bn for the buyback come from? This is far from clear but it is hard to imagine it being found anywhere other than the bailout funds, meaning a new transfer of around €9bn will be needed. This again poses significant political problems as leaders in Germany, the Netherlands and Finland (to name but a few) try to convince their parliaments (and public) that this is not more money into a black hole. It has been suggested that some of the other mechanisms mentioned below could be used to fund the buyback, but this looks impossible since they are being tapped to fill the existing funding gap.
These substantial obstacles to a successful debt buyback are crucial since the IMF has already stated its on-going participation in the Greek bailout hinges on this policy. The likes of Finland and the Netherlands have also previously stated that IMF involvement is requirement if they are expected to continue to aid Greece. With a plan on the buyback expected to be in place by 13 December, to allow for the release of the next tranche of bailout funds, this deal could hit a wall even sooner than many expected.
2. Interest rate reduction
The original bilateral loans to Greece will see their rated reduced by 1%, making it 0.5% over the 3 month Euribor rate. This means the interest on the loans could now be around 1% given current rates. Clearly this is much lower than the majority of eurozone countries can borrow at (especially given the very long maturities of the loans). Countries which are under a “full” bailout are exempted, although Spain, which is in the progress of seeking a bailout for its banking sector will not be. This could further political divisions within the eurozone.
This (along with other slight interest adjustments agreed) could deliver around €3.5bn up to 2016, so although it helps with the bailout extension it does not provide any real debt relief.
Meanwhile, reports already suggest that the Portuguese government has told its parliament that it will be seeking a similar deal with regards to its bailout.[4]
3. Deferral of interest and extension of maturities
This could aid in the short term, i.e. helping to fund the two year extension. However, on net it delivers no reduction and is once again a very short term ad hoc measure aimed at avoiding taking any significant decision on the Greek crisis – especially since a deferral on some interest payments was already in place. Similar things can be said of the maturity extension, especially given that many of the loans already have long maturities at 15 years. Once again this rescheduling of debt would amount to a technical default in most scenarios and does represent creditors forgoing real payments for a substantial amount of time.[5]
4. Dispersal of profits from the SMP
A key point here is that the ECB is not providing the money directly to Greece – thereby avoiding the legal problems of ‘monetary financing’, i.e. directly paying for states. The money will be dispersed to member states as usual and they will pass on an amount equivalent to this to Greece.
The issue with this however is that the profit from ECB actions, including profits accrued from its bond-buying programmes, is usually done on an annual basis and is paid out after it has passed through the ECB profit and loss account (meaning it can be used to offset any ECB losses, although this is unlikely at this time). It is not clear yet whether this will constrain when and how the money can be transferred. However, if the schedule is not the same a plausible case can be made that this is an additional injection of funds rather than a transferral of funds (although this is admittedly semantic over a long period).
5. The prospect of further measures in the future
The Eurogroup statement left the prospect of further measures to reduce the Greek debt burden hanging, teasing markets into believing that an official sector write down is just around the corner.
However, this does not quite seem to be the case. Firstly, such a prospect will only be realised if Greece manages to stick to its (still) strict reform and adjustment programme, something which, despite the extension, remains unlikely. This is driven home by the extensive strengthening of the ‘escrow account’ which increases the level of oversight and makes debt servicing the clear primary objective of the Greek government.
Secondly, while many have interpreted this deal as a step towards a larger more complete decision to keep Greece and others in the eurozone (some form of permanent fiscal transfer) this does not seem to immediately be the case. This deal does everything to avoid taking such a decision, and continues to sidestep the issue even if that means prolonging the pain and putting more taxpayer cash on the line. The hope is that such a deal will be politically more palatable after the German elections next autumn. This may well be true but given that many of the constraints on solving this crisis are legal as well as political, such a decision may not be much easier even after the elections.
Lastly, as the WSJ and FT point out today, extra measures will be necessary to reach the target of 124% debt to GDP in 2020.[6]
What does this deal mean for the Greek economy and the Greek people?
This is a question that has not been asked enough in the past two days, particularly the second part. The increase in oversight through the escrow account and the continuation of the current bailout programme mean more of the same for the Greek economy. Significant structural reforms are still to take place and internal devaluation is on-going. The two year delay in fiscal consolidation looks significant on the surface but much of this is offset by the amount Greece has missed its targets by this year given the two elections. The actual pace of fiscal consolidation is still rapid and the adjustment over the next few years, in an economy which is still contracting, will be unprecedented. The pay-out of the tranches (when and if the buyback hurdle is overcome) will be positive for Greece but only serves to help the economy limp along.
Given the impact on the Greek economy, the impact on the people can be inferred. There is unlikely to be any significant turnaround in the economy in the near future and the impact of public sector cuts will continue to be substantial, albeit maybe not as sharp as it would have been before the two year extension. However, the assumptions on unemployment in the Greek budget and latest Troika report look hopelessly optimistic – we expect it to continue to rise and public unrest along with it. In both cases more of the same seems to be on the cards despite this deal.
For more information please contact the office on 0044 (0)207 197 2333 or the author Raoul Ruparel on 0044 (0)757 696 5823.
[1] See here for a more detailed breakdown of debt shares and exact amounts for each share. The debt total of €301bn seems low given projections for the end of the year, however, when the next tranches of €34.4bn and €9.3bn are factored in the debt total is clearly in line with expectations. This does not include guarantees given by the Greek government, which amount to around €20bn. NCBs refers to National Central Banks.
[2] This amount is taken from a leaked document the key table of which was published by the FT. Cited by the FT Brussels blog, ‘Greece, round 3: let the debt relief talks begin’, 28 November 2012. For the specific table see:http://blogs.r.ftdata.co.uk/brusselsblog/files/2012/11/greece.pdf
[3] This is taken from a leaked document the key table of which was published by the FT. Cited by the FT Brussels blog, ‘New Greek bailout: the leaked chart’, 28 November 2012:http://blogs.r.ftdata.co.uk/brusselsblog/files/2012/11/Greece-2.pdf
[4] Cited by Journal de Negocios, ‘Portugal terá juros mais baixos e prazos mais longos nos empréstimos europeus’, 27 November 2012.
[5] This refers to the ‘Net present value’ loss which countries will face. Essentially this arises as future revenue flows are discounted, therefore the longer the payment of these loans is put off the less the money is seen to be worth in today’s terms. This drives home that creditors will be taking a loss somewhere along the line on these mechanisms.
[6] Cited by WSJ Real Time Brussels, ‘Greek debt deal explained’, 27 November 2012.
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